1. Corporate compulsory liquidation45
Corporate compulsory
liquidation

2. of Liquidation Process46
Liquidation – when?
Crs. Committee decides to liquidate C.Dr. at any time during CIR process, before confirmation of any Resolution Plan
On rejection of Resolution Plan
C.Dr. contravenes the Resolution Plan approved by AA, and any other person being prejudicially affected applies against such contravention
Order of Liquidation + Public
Announcement + Intimation to the Registrar
AA does not receive a Resolution Plan on or before the expiry of the maximum time permitted for CIR
Commencement
of Liquidation Process

3. Liquidation – few points47
Liquidation – few points
Immediate impact of liquidation order
▫ Company ceases to be a going concern
▫ All assets get vested in trustee
▫ All employees get discharged
▫ Interest stops accruing
Moratorium commences once a liquidation order is passed
▫ Not applicable to any proceeding pending in appeal before the Supreme Court or a High Court
▫ Suit or other legal proceeding on behalf of C.Dr. may be commenced by the liquidator with the prior approval of AA
Avoidance of transactions
▫ Preferential transactions
▫ Undervalued transactions
▫ Transactions defrauding creditors
▫ Extortionate credit transactions

4. Different modes of winding up companies48
Different modes of winding up companies
Resolution and Winding up in case of a default – Chapter II and III of this Code
Winding up on any of the grounds listed in section 271, as amended by the Code – Section 271 of Companies Act
Voluntary winding up (other than summary winding up process below) – Chapter V of this Code.
Summary winding up of companies having assets upto Rs 1 crore – sections of Companies Act, 2013
Winding up of unregistered companies including partnership firms and foreign companies – sections 375 and 376 of Companies Act, 2013
Dissolution without winding up by merger – section 232 (3) (d) of the Companies Act,
2013
Removal of the name of a defunct company from register of members – section of the Companies Act, 2013
In case of financial service providers, until explicit provisions are enacted, either the
Companies Act 2013, and/or the relevant special laws, will continue to prevail.

5. Snapshot of liquidation process (1/2)49
Snapshot of liquidation process (1/2)
Passing of liquidation order
▫ No suit or other legal proceeding shall be initiated
Without prior approval of the AA
Shall not apply to any proceeding pending in appeal before the SC or a HC
Such transactions as may be notified by the CG in consultation with any financial sector regulator
Appointment of liquidator
Formation of liquidation estate
Receive or collect the claims of creditors
▫ within a period of 30 days from the date of the commencement of the liquidation
process
Verify claims of all the creditors
▫ After verification shall either admit or reject the claim
Communicate the decision within 3 days of such admission or rejection of claims
Determine the value of claims admitted
Creditor may appeal to the AA against the decision
rejecting the claims
of the
liquidator
▫ within fourteen days of the receipt of such decision

6. Snapshot of liquidation process (2/2)50
Snapshot of liquidation process (2/2)
Liquidator shall apply to the AA for avoidance of –
▫ Preferential transactions
▫ Undervalued transactions
▫ Transactions defrauding creditors
▫ Extortionate credit transactions
Proceeds from the sale of the liquidation assets shall be distributed in the order of priority
Make an application to the AA for dissolution
▫ On assets being completely liquidated
AA shall pass an order
▫ Copy shall be forwarded to the authority with which the C.Dr. is registered
Within 7 days from the date of such order

7. Liquidation estate 3rd Inclusions Exclusions 51
Assets over which C.Dr. has ownership rights.
Assets in or not in possession of C.Dr. including but not limited to encumbered assets
Movable/Immovable tangible assets
Intangible assets
Assets in respect of which security interest has been relinquished by a secured creditor
Assets subject to the determination of ownership by the court or authority
Any assets or their value recovered through proceedings for avoidance of transactions
Any other property belonging to or vested in the C.Dr. at the insolvency commencement date
All proceeds of liquidation as and when they are realised
Assets in possession of C. Dr., but owned by a party – assets held in trust, bailment contracts, contracts for ‘use’ of assets and not
transfer of title, etc.
Assets in security collateral held by financial services providers and are subject to netting and set-off in multi-lateral trading or clearing transactions
Personal assets of any shareholder or partner of a C.Dr. , provided the assets are not held under avoidance transactions
Assets of any Indian or foreign subsidiary of C.Dr.
Any other assets as may be specified by the Board.
3rd

8. Exclusions from liquidation estate52
Exclusions from liquidation estate
Assets acquired on hire purchase, in Manasuba & Co. P.
Ltd., Re, (1973)
Amount received by way of deposit: Dinshaw & Co. (Bankers) Ltd. v. Mst. Krishna Piary, (1941) general rule of exclusion of trust money, and holding that where money is deposited by a person with a Bank as security for the good behaviour of an employee, the deposit is trust money
New Bank of India Limited v. Pearey Lal (1962): amount
held for remittance was held as trust money
An advance received in respect of a contract which was under negotiations retains its character of trust money, upon the failure of negotiations. Kodak Ltd. v. South Indian Film Corpn. Ltd., (1937)

9. Common law rule of set off53
Common law rule of set off
Mutual obligations of parties may be set off if the
common principles of set off are applicable:
▫ A has Rs to receive from B
▫ A has Rs to pay to B
▫ A can prove only for Rs 40000, setting of the entire obligation

10. Liquidation process 54 Rejection of a Claim Admission of a Claim
Within 14 days of receipt of communication
Within the time specified by the Board
Within 30 days
Appeal by
Cr. To AA
Commencement
of Liquidation
Process
Receipt and
Collection of Claims
Verification
of Claims by Liquidator
Rejection of a Claim
Communicatio n to Cr. and C.Dr.
Within 7 days
Admission of a Claim
Moratorium
Application by Liquidator to AA for Dissolution of C.Dr.
Order of
Dissolution
RP to act as liquidator unless replaced by AA
Valuation of
Claims
Distribution of proceeds from the sale of Liquidation Trust assets
Copy of the
Order to be forwarded to the Registrar
Formation of
Liquidation Trust by Liquidator
Complete
Liquidation
Within 7
days

11. Major differences between current55
Major differences between current
liquidation procedures and the Code
Liquidator appointed by creditors, full control of
creditors
NCLT‟s role is adjudicative, however, most of the powers
are auto-pilot powers
Timelines very tight
No role of civil courts at all
Priority of payments majorly changed

12. Preferential transactions56
Preferential transactions
Sec 43- Corporates & Sec 165 – Individuals
Examples-
▫ payment or set-off of debts not yet due;
▫ performance of acts - no obligation to perform;
▫ granting of a security interest to secure existing unsecured debts;
▫ unusual methods of payment;
▫ payment of a debt of considerable size in comparison to the assets of the debtor;
▫ payment of debts in response to extreme pressure from a creditor
Defences available
▫ transaction as consistent with normal commercial practice
▫ ordinary course of business
▫ „new‟ credit & „new‟ value
▫ counterparty proves that it was unaware of a preference
▫ no knowledge of the debtor‟s insolvency
Creation of an escrow in favour of certain payees was held to be voidable preference in Re Lewis’ of Leicester Ltd (1995)

13. Undervalued transaction57
Undervalued transaction
Sec 45 – Corporate & Sec 164 – Individuals
▫ What is not an arm‟s length transaction is an undervalued transaction
▫ Imply unequal exchange
What constitutes an „undervalued transaction‟?
▫ Gift
▫ Significantly less value
Not of „proportionate value‟ but „ordinary course of business‟ – Is it covered under undervalued transaction?
In Hill vs Spread Trustee Co Limited, creation of security
interest has been regarded as undervalued transaction.

14. Transactions defrauding creditors58
Transactions defrauding creditors
Sec 49- Corporate
▫ the transaction is an undervalued transaction under sub- section (2) of section 45;
▫ such transaction was deliberately entered into by the
corporate debtor;
▫ the transaction was entered into:
(a) for keeping assets of the corporate debtor beyond the
reach of any person who is entitled to make a claim
(b) to adversely affect the interests of such a person in
relation to the claim.

15. Extortionate credit transactions59
Extortionate credit transactions
Sec 50 – Corporate & Sec 167 – Individuals
What constitutes „extortionate‟?
Cannot presume that every regulated financial services provider will necessarily be compliant with either the law, or self-framed fair lending code

16. ▫ Any transfer made to a certain creditor, surety or guarantor. 60
Power of the RP or liquidator to seek avoidance and reversal of transactions
Broad description of the transaction to be avoided
▫ Any transfer made to a certain creditor, surety or guarantor.
So as to put the recipient in a beneficial position in relation to other creditors
▫ Gifts or transfer of property at a value significantly lower than the consideration paid by the debtor
▫ Any transaction deliberately intended
to put the assets of entity beyond the reach
adversely affect the interest to any claim
▫ Any financial or operating debt on exorbitant terms

17. Distribution of assets: order of priority61
Distribution of assets: order of priority
Insolvency resolution process costs and the liquidation costs paid in full
debts which shall rank equally
▫ debts owed to a secured creditor in the event such secured creditor has relinquished
security
▫ workmen‟s dues for the period of 24 months preceding the liquidation commencement date
wages and any unpaid dues owed to employees
▫ other than workmen for the period of
12 months preceding the liquidation
commencement date
financial debts owed to unsecured creditors
dues which shall rank equally
▫ amount due to the CG and the SG
including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of 2 years preceding the liquidation commencement date;
▫ debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;
any remaining debts and dues;
preference shareholders, if any; and
equity shareholders or partners, as the case may be. •
from
the proceeds
Fees payable to liquidator shall be deducted proportionately payable to each class of aforementioned recipients

18. Distribution of assets: order of62
Distribution of assets: order of
priority ..contd
The section brings very important changes in the priority
of distribution.
▫ First, it puts government dues, which, by several specific statutes are put on the top of the waterfall, to a position below unsecured lenders.
▫ Second, it distinguishes between financial creditors and operational creditors, putting the former in priority over the latter.
▫ Third, by putting the unrealized part of a secured creditor‟s claim who enforces security interest outside liquidation, to a position subordinated to unsecured creditors, it gives a positive temptation to secured creditors to join the queue in winding up, and gain priority.

19. Critical question for secured creditor63
Critical question for secured creditor
Whether to stay in liquidation proceedings, or stay out of
liquidation?
liquidation
Staying out – secured creditor enforces security interest, for remaining claim, he is at par with unsecured lenders
Staying in - secured creditor relinquishes security interest. Asset becomes part of the common pool. Secured creditor gains first priority out of all assets
▫ Decision to be based on:
LTV ratio of the secured asset vs. LTV ratio of other free assets
of the entity
Recovery rate depends on the choice
▫ Choice once made cannot be changed
▫ Secured
creditors
will
have to take an early call on
whether
to stay
out of
liquidation or to stay in

20. Provisioning implications of the Code64
Provisioning implications of the Code
Once an insolvency resolution application is filed
▫ Prima facie, this is an indication of weakness in credit; should warrant provisioning
Once resolution application is sanctioned
▫ Provisioning may be required based on the fair value of the restructured facility
Once company goes into liquidation
▫ Deeper provisioning may be required looking at the deficit on assets